Chongqing

Launch Pad for China's Westward Liftoff

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Over the past decade this city deep in China's interior has been changing its own destiny. Can Chongqing realize its ambitions of opening up to the outside world and bring real development to China's wild west?

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Launch Pad for China's Westward Liftoff

Those that haven't been to Chongqing are likely unaware that the former wartime rear area has now morphed into a major metropolis packed with people.

Daytime Chongqing is awash with the hubbub of investor activity. Of the world's top 500 companies, 161 have an established presence here. Acer founder Stan Shih's iD SoftCapital Group held its annual shareholder's meeting in Chongqing last month. Also in late October, American authors and China trend-watchers John and Doris Naisbitt launched their new book in Chongqing. And Acer recently revealed that Chongqing will be the home of its second Chinese base, including a new global IT manufacturing center.

By night, the real estate and consumer frenzy that has overtaken Chongqing becomes even more apparent. Amid the dazzling lights of the Hongya Dong along the banks of the Jialing River, customers pack into the hotpot shops. Looking down at the twinkling city lights from atop one of the towers of the luxury Sincere apartment complex, where a square meter of floor space currently goes for about 20,000 renminbi, one gets the feeling of standing in a Mid-levels penthouse on Hong Kong's Victoria Peak.

This building just went on the market and has been snapped up, with 40 percent of buyers non-local, mostly from Shanghai, Wenzhou and Taiwan. Chongqing is building upward, and there are now an estimated 6,800-plus structures of six floors or higher in the city.

In 2000, the city's GDP stood at just a little over 100 billion renminbi but is this year expected to reach 780 billion renminbi, a more than six-fold increase over the past decade.

What prompted the transformation over those ten short years that made Chongqing so red hot this past year? And what is the deeper narrative behind that metamorphosis?

A Battle with Nature

Chongqing had actually adopted something of a "remedial" market approach, employing government policy to prop up and strengthen the local economy before opening up avenues of free market competition.

Situated at the confluence of the Yangtze and Jialing Rivers, Chongqing sits at an average elevation of 400 meters above sea level, but the topography varies wildly. Transportation can be a big headache, as traveling between the north and south sides of the rivers involves having to take either an aerial cable car or river ferry.

The problems this topography posed for the city's development can be hard to imagine. Building a kilometer of highway here costs an average 80 million renminbi, while a kilometer of comparable highway in Shanghai costs just 30 million renminbi.

"It's not that people in Chongqing are idiots," Chongqing mayor Huang Qifan, a former economic planner for the Shanghai Municipal Government, explains to CommonWealth Magazine. "It's just that for a hundred kilometers of highway here, you've got 60 kilometers of tunnels and bridges, and building them raises costs."

Over the past decade, however, Chongqing has managed to expand its highway network from 100 km to about 2,000 km and its railroad network from 500 km to 1,500 km.

But it's not just about building bridges and paving roads. These transport networks have established a distribution system to carry goods out of China's vast interior.

Chongqing sits at the heart of China's hinterland, surrounded by five provinces, and is 2,000 km from the ports of the east coast. Yet over the past several months, it has rapidly opened a rail link with Europe, altering the limitations on its distribution paradigm.

Beginning in November, Hewlett-Packard-branded notebook computers that are contract manufactured through Foxconn, Quanta and Inventec will be transported by train from Chongqing through central China, across 4,000 km of Xinjiang frontier, traversing another 4,000 km of Kazakhstan and 1,000 km of Russia to arrive in Moscow, then continuing on to their ultimate destination at Rotterdam, in the Netherlands. This southern route of the Asia-Europe rail link will take 12 to 13 days, at least 10 days quicker than from China's eastern coastal cities via the traditional northern Asia-Europe route along the Trans-Siberian Railway, which crosses more than 10,000 km of Russia into Europe.

If all goes well, after two years perhaps as many as one-quarter of the 300-plus million notebook computers shipped worldwide will travel via this railway bound for markets in Europe.

Chongqing Redefines Itself

As the onetime rear echelon of China's war effort, Chongqing boasts rich experience in heavy industry and manufacturing and occupies a strategic location straddling the northwest and southwest regions. But for a time there, Chongqing was desperately searching for some kind of breakthrough.

In 1997 the central government listed Chongqing as an autonomous special municipality, but it was in the worst shape of any of China's four such cities: Fully two-thirds of its 30 million population were peasant farmers. Of the city's 41 counties and administrative districts, the central government listed 17 as "impoverished." And the city was tasked with relocating more than one million residents living upstream from the massive Three Gorges Dam project. Chongqing at the time was like a microcosm of China's impoverished Great West.

In the past few years, however, Chongqing seems to have found its way and reached a turning point.

Soaring energy costs resulting from threats to and disruptions of fossil fuel supplies have oddly enough made transport from China's interior to South Asia and Europe appear to have a competitive advantage over the cities of the east coast. Additionally, the outbreak of the global financial crisis saw China and other countries across the globe reassessing the importance of their domestic demand market operations. It was here that Chongqing began to redefine itself, shifting from its former guise as a mountain city of heavy industry to a base for advanced manufacturing and modern service industries, as well as the financial and innovation center at the headwaters of the Yangtze.

Reducing Logistics Costs, Global Orientation

Traditionally Chongqing's biggest problem in opening up to the outside world lay in distribution costs.

In times past the export processing trade in China's interior essentially amounted to nil. Moreover, in China's coastal cities, both ends of the export processing chain were located abroad, with raw materials and components sourced from the outside and finished products eventually shipped to overseas markets.

Chongqing had no means of convincing businesses to pay for the cost of 2,000 km of extra transport, so it settled on the model of a "unified supply and production chain," for example, a "1+3+100" model whereby Hewlett-Packard brings aboard its three contract manufacturers Foxconn, Quanta and Inventec, who in turn bring in the 100-odd companies supplying peripheral parts and components.

Once the industries for development had been identified and a production operation model designed, the city applied to the central government for designation as a tariff-free port zone to reduce the transport costs of companies doing business there.

Over the past 20 years, all of China's 15 designated tariff-free port zones have been located along the coast, but this year Chongqing was able to secure two tariff-free port zones. Cargo initially entering Chongqing can be placed within the port area without being subject to taxation, "like a bonded warehouse," says XinMing Li, vice director of the Chongqing Liangjiang New Area Administrative Committee. "Cargo can be placed here without paying taxes. Whenever they are to be used, taxes can be paid. This is significant for large quantities of goods."

The orientation is not just toward Central Asia. Chongqing's other economic locomotive – automobile and motorbike/scooter manufacturing – has also now penetrated South Asia. The city produces nearly four million automobiles and eight million motorbikes/scooters annually. Local concern Changan Automobile Group is now exporting finished autos to the Vietnamese and Cambodian markets.

The world's business playing fields have become increasingly level, and this has led to the concept of the global division of labor, but Chongqing has been bucking this trend, using leasing and tariff incentives and administrative support to entice entire industrial chains to set up shop in Chongqing to build and export finished products to European and Southeast Asian markets.

Government subsidies have provided Chongqing with an opportunity to earn export trade riches but, looking at it from a practical perspective, Chongqing's brightest spot lies in China's massive domestic demand.

"Going forward, China will not be driven by external demand as it has been for the past 30 years," Huang Qifeng predicts. "It will likely be largely driven by domestic demand in concert with the forces of external demand, gradually settling in at around a 3-to-7 split (30 percent export driven economy, 70 percent domestic demand)."

Domestic Demand Revitalizes SMEs

Chongqing has in recent year been encouraging private businesses to expand externally.

The municipal government has been aggressive in courting venture capital, financing, small cap loans and other financial service providers to create a financial environment unlike that found in China's coastal cities and to play the role of finance capital on the upper reaches of the Yangtze.

Foreign banks have boldly entered the fray, as have Chinese banks serving areas from which businesses are recruited, including national players like China Merchants Bank and Shanghai Pudong Development Bank (SPD) as well as regional players from Harbin, Dalian, Qingdao, Chengdu and Xiamen (Taiwan's Fubon).

Chongqing has also set up various trade exchanges, including a transport exchange, trading in transport resources and services; an agricultural and livestock commodities exchange (pork futures); a traditional Chinese pharmaceuticals raw materials exchange; and a stock options exchange.

Under the changes wrought through national policy directives and the Chongqing municipal leadership, city residents seem to have discovered a new sort of spirit of openness and hope. Although the levers of state power have been utilized to create the distribution and free port areas, only the test of the market will tell if success can be found in the tough markets of South and Central Asia. The case of Chongqing is fairly unique, and the model adopted there would be difficult to apply in the even harsher terrain of Qinghai and Gansu provinces.

But Chongqing has definitely rediscovered its way in the 21st century, with a huge potential for domestic demand and virtually limitless power to branch out, and is set to become one of the most irrepressible stars in the Chinese galaxy.